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Options for Your Business' Software—Lease, Build or Buy

Photo: Jonathan Wayne

Jim Fahey at Brott Mardis says $1 million was too much to spend to become an ASP. "We are accountants first; that is what we do well."

Supporting off-the-shelf applications in-house isn't always the best option, according to a growing number of companies who say they aren't content with packaged products. Instead, they're building and leasing software to get access to the specialized functionality needed to give their businesses an edge.

Limitations in software options for small businesses — whether off-the-shelf or on-demand — and sturdier development environments are causing numerous small businesses to forego commercial packages and build their own custom apps. These small businesses consider custom-built applications a viable option for gaining access to legacy applications, meeting unique reporting requirements or automating a vertical business process.

About 57 percent of information technology managers surveyed in a January 2006 BizTech poll of 225 small businesses say their company has recently custom-built a software application because they couldn't find what they wanted on the market. Of that group, only 3 percent reported regretting the decision later.

Additionally, businesses are turning to subscription-based or on-demand software. BizTech's poll found that 15 percent of small businesses are currently using these applications, and another 15 percent report that they're evaluating such services for access to specific applications or because it's cheaper or more reliable than running the same applications in-house.

BizTech's survey results jibe with those of market research and consulting firm Gartner Inc., which predicts that one-third of all new software deployed over the next five years will be delivered as a Web-based service rather than purchased and installed in-house.

Hosted Apps

Hosted apps were all the rage during the dot-com boom, when an estimated 1,000 to 1,500 companies known as application service providers (ASPs) sprung up, offering subscription-based or on-demand software over the Internet for a monthly fee.

On-demand software reduces the need for dedicated server resources, as well as simplifying upgrades and maintenance. Among its drawbacks are that it's difficult to integrate with existing applications, and it's not as easily customized as packaged software. But for small businesses that typically have fewer and less complex "legacy" applications to integrate, have limited IT staff and need specific vertical offerings, on-demand software may provide a cost-effective way to access applications once reserved only for large, well-heeled companies.

Custom-built applications are not dead either. With improved tools such as Microsoft Corp.'s .NET development suite and a plethora of Java-based integrated development environments, numerous small businesses are hiring developers to build their apps.

For example, take Phillips Architecture: The 27-person firm needed a collaborative application that could tackle business process management, project management and customer data that are focused on interior design. After an exhaustive search, the IT manager and CEO decided to build a custom application in-house.

"It's hard to find a category that fits what we are doing," says Ryan Suydam, IT manager at the Raleigh, N.C.-based firm. "There are dozens of enterprise tools that Fortune 500 firms can afford but not many that fit our business," he says. Phillips Architecture will spend $80,000 to build a Microsoft .NET app to do just that and hopes to help cover the costs by eventually leasing it as an on-demand application to other interior design firms. Phillips is beta-testing the application now. [See p. 29 for details.] The company also uses on-demand software for benefits, payroll and taxes,and functions not considered mission-critical-, Suydam says.

But Phillips Architecture isn't a lone development crusader. Other small firms are tempted to build rather than buy or do without the business advantages that critical apps can provide. Brott Mardis & Co. fits that description.

Several years ago, Jim Fahey, the network administrator at Brott Mardis, looked into building a custom accounting application and providing it to clients. But cost estimates came back at more than $1 million for development, plus the cost of hiring two IT staffers for maintenance — a price tag too high for the 30-person accounting firm.

"We did not want to lose clients who wanted Web services to our competition," Fahey says. "The cost of becoming an ASP was too much for us, plus we do not have much background in that area. We are accountants first; that is what we do well."

Now, the Akron, Ohio-based company is going to spend $2,500 per month on a specialized, on-demand financial application that "costs significantly less, but our accountants can access it at 3 a.m., when most people are sleeping."

Factors to Consider

If your company is considering using or selling subscription-based software, keep the following in mind:

Service-Level Agreements and Service Hours:Service-level agreements (SLAs) and uptime guarantees become critical with software provided by outside vendors. Customers should verify that the service levels offered actually meet business needs. Verify that routine scheduled maintenance windows don't conflict with critical business activities. If you're offering the service, make sure you have adequate help-desk resources to answer your clients' inevitable questions.

Connectivity: Just as companies deploy redundant servers to provide backup access to critical data, on-demand software customers and ASPs need to maintain backup Internet connections to avoid outages for their key applications. Depending on how critical the online application is to a business, downtime caused by network outages could cause serious business disruptions. In practice, this could mean redundant routers and firewalls, and even a secondary Internet connection, such as an inexpensive DSL line. To guarantee access to a subscription-based application, customers and ASPs need to avoid a single point of failure in their network architecture.

Location and Access: One main draw of on-demand software is its accessibility from anywhere in the world. However, access speed can vary greatly by location, especially overseas. Customers with remote locations or teleworkers should check Internet performance from locations where users will be working regularly.

Compatibility: Most subscription-based software is browser-based, and given Microsoft's dominance in the browser market with Internet Explorer, some vendors only test with this browser. Ensure that your service is compatible with your desktop browser.

Application Levels and Contractual Commitments: Subscription-based software is often cheaper in the short-run, and many providers give customers the flexibility to add and drop users as needed. But the best discounts may only be available for customers that commit to year-long or multiyear contracts with a minimum number of users. Additionally, on-demand software vendors typically offer different service levels or editions of their applications that include certain features. Not all providers let customers mix and match service levels, however, meaning that if one user needs the most powerful package, the company must pay the higher subscription price for all its users.

ROI: Just like off-the-shelf software, leased or custom-built applications take time to show a return on investment. Most analysts estimate a 36-month window for leased applications and 48 months for custom-built apps offered as an ASP.

Does your company develop custom software applications in-house?

32%

Yes, it's difficult to find customized products in our industry

26%

No, we only utilize off-the-shelf products

23%

Only when we can't find off-the-shelf products

15%

No, but we heavily customize off-the-shelf products

3%

Yes, we did in the past and are paying for it now

1%

Other

Does your company use on-demand or subscription-based software services?

55%

No, we don't see a need or we use off-the-shelf products

15%

No, but we're evaluating some applications now

12%

Yes, it's cheaper than managing the resources internally

12%

No, we have concerns about the security of our data

4%

Yes, it's the best way to get access to custom applications

2%

Other

Source: CDW BizTech poll, January 2006

Jeremy Snyder is the Managing Director of Extensive Development LLC, in Chantilly, Va., where he has helped numerous companies plan and implement on-demand software deployments.